Law firm faces €25m damages bill over loans

A LAW firm is facing a damages bill of up to €25 million over what the High Court described as “egregious” failures to ensure KBC Bank had proper security for substantial loans made to property developer John Kelly and struck-off solicitor Thomas Byrne.

Mr Justice Brian McGovern said the breach of duty by BCM Hanby Wallace, now Byrne Wallace, to KBC was “egregious” and “most serious” because the firm not only failed to ensure proper security was in place but deliberately misled the bank by either suggesting security was in place or the funds would not be released to the borrowers until it was in place.

The breach of duty amounted to “a deception” because the firm was aware the required security was not in place but led the bank to believe it was, he said.

An unusual feature of the case was “the scale and scope” of the negligence involved, the judge said. This was not about a single act of negligence but “multiple failures” which the defendant repeated across four separate loan transactions.

The loans were to have been secured on 30 properties but were secured on just three, he noted.

He rejected arguments by the firm of contributory negligence by KBC in failing to properly check out the creditworthiness of either Mr Byrne or Mr Kelly before agreeing to advance loans of €9 million and €16 million to them respectively on dates from 2005 to 2007. KBC was entitled to rely on assurances from professionals retained by it, he said.

KBC, he ruled, was entitled to damages on a “no transaction” basis – that it would not have made the loans and therefore not suffered the consequent loss if the solicitors had told it the necessary security was not in place.

Issues related to the exact amount of damages have been adjourned. The judge said the bank is entitled to recover the full amount of the loans advanced, plus certain costs and stamp duty, but minus the 2008 value of the three secured properties, some €900,000 received from Mr Kelly, the value of another property at Oilgate, Co Wexford, and certain costs. The costs of the action are also likely to amount to several million euro.

KBC had alleged, instead of ensuring it had proper security, the firm obtained a first legal charge in favour of KBC only on three properties and accepted undertakings from Mr Byrne, which were not complied with, to put measures in place ensuring security. It disputed the firm’s claims it had acted on its instructions in accepting undertakings.

During the hearing, Ronan Egan, a partner in the firm who dealt with KBC, accepted he should have made inquiries about charges on the properties before accepting any undertakings but argued this was general practice at the time and commonly done.

Given those and other admissions, the firm could not avoid findings of negligence, breach of duty and breach of contract, the judge said.

The firm had argued it was only liable for failing to obtain the relevant security and, as part of its contributory negligence claims, alleged KBC was aggressively pursuing Mr Kelly and Mr Byrne and would have made the loans in any event.

Having analysed the evidence, the judge found the bank was “somewhat careless” in its appraisal of both borrowers before agreeing to make the loans, including failing to check out an “entirely bogus” claim that Mr Byrne was getting annual fees of €4 million for consultancy services to “French fashion houses”.

While many of the criticisms of KBC were made with hindsight and knowledge Mr Byrne was struck off for dishonest conduct, several facts should have aroused the bank’s suspicions about the true financial worth of the pair and their reliability, he said.

However, the undisputed evidence was, if the solicitors had adhered to the bank’s instructions concerning security, none of the loans would have been made and that disposed of the claim for contributory negligence, he ruled. No bank which retained the services of a professional should have to check into assurances provided by those professionals.